Buy Notes – Hitting a Put Shot With a 9-Iron

Buy Notes – Do You Know Your Borrower?

I recently was on a call with a Sr Vice President of a California bank, they were in charge of the banks note sales. I was introduced by a broker friend of mine.

The bank had 3 defaulted mortgages which were commercial loans based in the Los Angeles area.

A Buy Notes Lesson about Golf Clubs and why to Communicate with Your Borrower

Stay with me here…

As we continued our conversation…the SVP at the bank notified me that one of the loans had a scheduled foreclosure sale in 2 weeks.

The bank had not been in contact with the builder/developer (borrower).

I asked her if she was worried about possible problems when taking over the properties through foreclosure. And if she had any other concerns regarding the loans.

She told me she wasnt concerned because the property values would allow them to pay off their loan.

Buy Notes – My Concerns

The main thing that I’ve learned while I’ve been in the note buying business is that your relationship with your borrower is key and you need to manage it properly.

By not working with your borrower, you can really mess up your chances of getting out of your note deals.

Let me explain…

For all loans, there are 5 Note Buying Exit Strategies:

refinance, short sales or deed-in-lieu, reperformance, note sale, and foreclosure.

Foreclosure and note sale are the only 2 exits that you can do with no communciation to your borrower.

But the risk that the foreclosure runs – and foreclosure is the path that the banker is taking in this example – is that the borrower may file for bankruptcy and postpone the time when you recover the property.

Tip on Buying Notes

Make fantastic returns when buying notes without having to foreclose or to sell the note on to someone else.

If that’s true, then losing contact with your borrower essentially kills 60% of your note buying exits (3 of the 5).

Would a seasoned golfer get onto a golf course with only 5 out of their 12 clubs?

Would that be somewhat limiting to their game?

Most likely.

It would be a funny sight watching him hit a putt with a 9-iron.

I know it can be painful, but working with your borrower is essential in the note buying business.

This is the advice that I gave to the SVP at the LA bank today.

We’ll see if she takes my advice – we’ll be tracking her nonperforming notes to see if any of them end up in bankruptcy.

And if those notes do – there’s a good chance that she’ll regret not having kept in touch with her borrower.